To Aggregate or Not to Aggregate? Euro Area Inflation Forecasting

67 Pages Posted: 3 Dec 2004

See all articles by Nicholai Benalal

Nicholai Benalal

European Central Bank (ECB)

Juan Luis Diaz del Hoyo

European Central Bank (ECB)

Bettina Landau

European Central Bank (ECB)

Moreno Roma

European Central Bank (ECB)

Frauke Skudelny

European Central Bank (ECB)

Date Written: July 2004

Abstract

In this paper we investigate whether the forecast of the HICP components (indirect approach) improves upon the forecast of overall HICP (direct approach) and whether the aggregation of country forecasts improves upon the forecast of the euro-area as a whole, considering the four largest euro area countries. The direct approach provides clearly better results than the indirect approach for 12 and 18 steps ahead for the overall HICP, while for shorter horizons the results are mixed. For the euro area HICP excluding unprocessed food and energy (HICPX), the indirect forecast outperforms the direct whereas the differences are only marginal for the countries. The aggregation of country forecasts does not seem to improve upon the forecast of the euro area HICP and HICPX. This result has however to be taken with caution as differences appear to be rather small and due to the limited country coverage.

Keywords: Forecasting short-term inflation, HICP sub-components/aggregation, Bayesian VARs, Model Selection

JEL Classification: C11, C32, C53, E31, E37

Suggested Citation

Benalal, Nicholai and Diaz del Hoyo, Juan Luis and Landau, Bettina and Roma, Moreno and Skudelny, Frauke, To Aggregate or Not to Aggregate? Euro Area Inflation Forecasting (July 2004). Available at SSRN: https://ssrn.com/abstract=533134

Nicholai Benalal

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Juan Luis Diaz del Hoyo

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Bettina Landau

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Moreno Roma (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Frauke Skudelny

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
150
Abstract Views
2,255
rank
242,328
PlumX Metrics